Wednesday, October 31, 2012

The Society of Corporate Secretaries and
Governance Professionals has major concerns with a proposed revision to the Institutional
Shareholder Services (ISS) voting policies on a board’s response to a
majority-supported shareholder proposal. In a letter to the ISS Global Policy
Board, the Society said that the proposed change would undermine the exercise
of directors’ fiduciary duties on matters that under state law are firmly
within the board’s purview. The Society urged the Global Policy Board to reject
this proposed change.

Currently, ISS policy provides for opposition
to all incumbent directors if the board does not act on a shareholder proposal
that was supported by a majority of outstanding shares the previous year, or a
majority of shares cast the previous year and at least once in the two years
before that. The revised policy would accelerate this process, with against or
withhold recommendations on all but new directors if the board does not act on
a shareholder proposal between the annual meeting and the publication of the
proxy statement for the next annual meeting, whether the shareholder proposal received
a majority of votes outstanding or a majority of votes cast.

In the Society’s view, this shortened time
frame for a board to take action in instances where a proposal is supported by
a majority of the votes cast, rather than a majority of the outstanding shares,
raises significant concerns about the coercive nature of the director vote and
its impact on the ability of directors to perform their fiduciary obligations.

The Society noted that fiduciary duties do
not disappear or become less significant when a majority of the votes cast at a
meeting support a particular non-binding shareholder proposal. A fundamental principle of state corporation
law is that directors are not mere agents of shareholders but must exercise
their independent judgment to act in the best interest of the corporation. Thus, boards of directors cannot implement a
proposal presented to shareholders that they do not believe would be in the
best interests of a company. Rather, they must determine the most appropriate
response to the proposal, which may be to consider other actions they believe
address the shareholder concerns in a manner consistent with the best interests
of the corporation.

The Society believes that in these
circumstances the appropriate policy approach would be to consider disclosure
of board action with respect to alternatives considered, any action taken and
the board’s rationale for its decision.
An automatic recommendation against all directors is inappropriate and
inadvisable. The group also said that the importance of the shareholder
proposal in question, and the importance of other factors in the election of
directors, is not being given due consideration in the proposed policy
change.

There is a risk that an entire board under a
majority vote framework will be removed for failure to set special meeting
rights at a 10 percent threshold rather than 15 percent. If the director vote matters, reasoned the
Society, making it contingent entirely on one, possibly minor, difference does
not serve the interests of the company or the shareholders.

Moreover, in view of the number of companies
that have adopted majority voting for directors and eliminated staggered board
elections, an ISS negative vote recommendation could result in the failure to
elect a board. According to the Society,
a strict one-size-fits-all policy that leads to this result without any consideration
of the broader circumstances, including the positive value that a board brings
on other matters and the level of importance of the particular subject matter
of the proposal, cannot be in the interest of the shareholders.

The Society is also concerned that the policy
is based on a majority of shares voted, not on a majority of shares outstanding,
and does not take into account whether the proposal was approved under the company’s
own rules. The expression of substantial opposition to the ISS view, by for
example 49 percent of shares voted, apparently is seen as meriting no
consideration by a board, where a compromise on an issue may make more sense. This is in stark contrast to the ISS policy
on say-on-pay, in which substantial opposition by a minority of shares voted is
said by ISS to require a response from the board. A board should have some flexibility to take
into consideration substantial minority views.

In addition, the revised policy is silent on
the circumstances under which ISS would view a board as having failed to act on
a majority-supported shareholder proposal.
It would thus appear that, under this policy change, ISS would be second-guessing
board decisions to implement a proposal in an alternative manner, even where
the alternative approach is submitted for shareholder approval. The Society believes that this is
fundamentally at odds with a board’s fiduciary duties under state corporate
law.

For example, a board may respond to a
proposal to permit shareholders to act by written

consent by reducing the ownership threshold
at which shareholders can call a special meeting. In this instance, the Society
queries if ISS would call for a vote against all directors. While ISS
previously has not recommended against directors in some cases like this, the
change in policy would appear to yield a different result.